By JON COUPAL
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Reprinted with permission of Jon Coupal, president of the Howard Jarvis Taxpayers Association
Earlier this year, Howard Jarvis Taxpayers Association raised the alarm over the resurgence in the use of “pension obligation bonds,” a risky financing method that fell out of favor during the 2008 recession but is now making a comeback.
Fortunately, there is more scrutiny on this form of debt financing than in years past, and taxpayers are starting to take a keen interest in whether POBs are in the best interests of their local governments.
Citizen awareness and improved oversight will be crucial.
To refresh citizens’Â understanding of what this is all about, POBs are bonds issued to fund, in whole or in part, the unfunded portion of public pension liabilities by the creation of new debt. It is like paying your Visa bill with your Mastercard.
Advocates of this strategy rely on an assumption that the borrowed money from the sale of bonds, when invested with pension assets in higher-yielding assets, will achieve a rate of return that is greater than the interest rate owed on the borrowed money, which is paid back over the term of the bonds.
A policy reflected in the California Constitution since the 1800s is that government debt should be approved by the voters. The reason for this is simple – today’s politicians should not be allowed to burden tomorrow’s taxpayers without the consent of those financially obligated for the repayment. Back in 2003, the Howard Jarvis Taxpayers Association sued the state of California for its attempt to issue a statewide POB without voter approval. HJTA prevailed and the POB bond proposal was invalidated.
Despite that victory, taxpayers still find themselves having to go to court to enforce voter approval requirements for pension obligation bonds. In December, the Simi Valley City Council adopted a resolution authorizing a $150 million dollar pension obligation bond to securitize its unfunded accrued actuarial liability (UAAL). This would have constituted new debt, but the city council did not seek voter approval.Â
Instead, Simi Valley filed a validation lawsuit asking the Ventura County Court to approve the bond resolution.Â
Ventura County Taxpayers Association on behalf of itself as well as HJTA joined the litigation to assert the rights of voters to approve or disapprove the bond under the constitutional provision requiring two-thirds approval of new debt. Rather than litigate the voter approval issue, the city agreed to rescind its resolution in a settlement and dismiss its lawsuit.
Other cities are considering or have actually pursued POBs without voter approval, including Riverside and Montebello.
The Government Finance Officers Association, an association of officials employed by government entities, recommends against issuing any POBs because “the invested POB proceeds might fail to earn more than the interest rate owed over the term of the bonds, leading to increased overall liabilities for the government,” and “issuing taxable debt to fund the pension liability increases the jurisdiction’s bonded debt burden and potentially uses up debt capacity that could be used for other purposes.”
In other words, the government could lose money on the deal, become overextended on its credit which would, in turn, “crowd out” the ability to fund essential services.
When HJTA warned back in January about the risks associated with POBs, the concern was about a potential recession and the economic uncertainties brought on fires, floods, droughts and earthquakes.
Little did we know that a global pandemic would make the economic uncertainties of the past seem trivial by comparison. Because of these uncertainties, as well the potential for litigation, governments should avoid any POBs like a virus.
Reprinted with permission of Jon Coupal, president of the Howard Jarvis Taxpayers Association.
The Ventura County Taxpayer Association is made up people who recognize the importance of government to our communities. Government should be efficient, effective and always transparent. If you would like to support our efforts, please click here to go to our website and join us . Thank you.Â
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